Westpac: USD to soften again and limit AUD/USD decline – FXWW Chatroom

AUD/USD starts the week probing almost 3 week lows near 0.7800. Friday’s NY trade saw a broad wave of USD buying when the US core infl ation measure for April printed stronger than expected. Fed chair Yellen also said interest rates were likely to be raised this year, albeit conditional on improvement in the US economy. But we doubt the more positive USD mood will persist over the week. After the Memorial Day holiday today, a busy US data calendar is likely to mostly prove mixed to soft, leaving markets priced for a steady Fed funds rate until December. 
But a softer USD is shaping up as a rare source of support for AUD/USD in the week ahead. Iron ore prices bounced on Friday but it is hard to see any trade above $60 lasting long (Q4 2015 contracts are trading around $51-52/tonne). The May China manufacturing survey included the output index weakening to a 13 month low and new export orders at a low since 2012. China PM Li said he is confi dent China will meet its 7% growth target for 2015, but this may be a story 
for H2, with near term momentum still poor.
 
On the home front, AUD should also be hampered by the clarifi cation of the RBA’s easing bias. Deputy Governor Lowe and the May Board minutes stressed that the absence of an overt bias when the cash rate was cut in May did not mean a neutral outlook. Rather, the RBA looks to have an easing bias, albeit not especially strong at the moment. Markets are pricing around a 65% chance of another rate cut by December, a view unlikely to change much over the week, though it is certainly worth watching Australia’s construction data and capital expenditure survey. 
AUD itself remains important in the RBA rate cut equation. Trade near AUD/USD 0.80 implies substantial overvaluation according to our economists’ calculations. The longer such AUD levels persist, the stronger the case for at least a more explicit easing bias. It is hard to see any renewed trade in the 0.80s lasting very long. We look for AUD/USD to be roughly stable into mid-year but slip towards 0.73 by Sep. AUD/NZD should be fairly resilient though, holding the bulk 
of the gains since the RBNZ’s change from neutral to an easing bias in April. 

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